Social Cost Benefit Analysis in Options Appraisal
Structured Thinking for Real World Decisions
Accounting for Trade-offs
Informing Decisions
Homes &
Environment
Communities
Economic
Growth
Energy Supply
Security
Public Health Employment Green Growth Foreign Aid
Transport
Justice
Welfare
Appraising Options at OBC stage using Social Cost Benefit Analysis
Defence
1
Tension Intrinsic to Public Service Decisions
DEMAND MORE
DEMAND LESS
Service
Demand
Tax and
Spending
The pressure will only increase
enormous demand for multiple ends Vs limited resources
Protection by
Regulation
Appraising Options at OBC stage using Social Cost Benefit Analysis
Red Tape
2
英国财政部
政策评审、商业规划与商业论证
绿皮书
The Green Book is Internationally regarded as a
world leading gold standard
约瑟夫.劳尔
经济学部负责人
英国财政部公共服务与增长司
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Green Book is
.
.
not an automatic
A framework and an
decision making
algorithm like a machineanalytical methodology
for ;
•Objective
•Transparent
not a recipe book
•Decision Support
Appraising Options at OBC stage using Social Cost Benefit Analysis
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The Green Book – is the tip of the iceberg
Green Book
Supplementary Guidance
Departmental Gudance
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Better Business Cases
The Treasury method reduces pointless
bureaucracy and is : Proportionate (relating resources to cost and risk)
 Scalable (thinking model applicable at all levels)
 Flexible (process adaptable to suit decision)
 Efficient (productivity gains of 30% to 40%)
 Effective (all key questions are covered)
 Best Practice (tried and tested)
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Economic Case:- Appraising the Options
JL
- a two step process
Identify
Critical Success Factors
Long list of Options (12)

SWOT analysis against: –
• Spending Objectives
• Critical Success Factors
• Constraints
• Dependencies
Step 2
Short listed Options (Min 5)

VFM Benchmarking must
include
-Do nothing
-Do minimum
-Other realistic options (M3)
Cost Benefit Analysis (CBA)
Cost Effectiveness Analysis (CEA)
Multi Criteria Analysis (MCA)
Qualitative costs and benefits
Risks
Sensitivity Analysis
Appraising Options at OBC stage using Social Cost Benefit Analysis
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JL
Step 2 Detailed Options Analysis
The Economic Case and Appraisal
Optimising Vale for Money
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Green Book Appraisal of Public Value
a two stage process for assessing Public Value
Step 1 – Long  Short List
Consider a long list and identify the short list using
Step 2 - Short List  Preferred Option
Cost Benefit Analysis considers as far as possible costs
and benefits to society
Where relevant also an analysis of distributional effects
-winners and losers
Appraising Options at OBC stage using Social Cost Benefit Analysis
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In Options Analysis at OBC we need at
least 3 viable options plus Inclusion of :1) a mandatory status quo or do nothing option
as a benchmark for intervention
2) mandatory do minimum option
a benchmark to
help identify
gold plating ----
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Public Value & CBA
Public Value is measured by the “Economic
Case” through use of Social Cost Benefit Analysis
(Social CBA)
Social CBA aims to appraise the effects of each
option on total welfare
Social CBA is performed on the shortlist as part of
the Outline Business Case (OBC)
Best public value is appraised by comparing the
Net Present (Public) Value (NPV) of the shortlisted
options, and Risk and significant unquantifiables.
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Value for Money & The Public Sector Value Chain
Efficient Procurement
£
Public
Spend
+
£
Other
Costs
Doing Things Right
Doing the Right Things
O
I
u
Current
Business
n
t
p
Economy
Efficiency
p
Effectiveness
u
u
Cost Effectiveness
Analysis
t
t
s
s
New Business , Regulation
AndEconomic
Zero Based
AppraisalReviews
using
Cost Benefit Analysis
Cost Benefit Analysis
Appraising Options at OBC stage using Social Cost Benefit Analysis
JL
O
u
t
c
o
m
e
s
+
Wider
Welfare
Benefits
£
12
Cost Benefit Analysis  Public Value
• Quantifies in monetary terms as many of the costs and
benefits of a proposal as feasible, including items for which
the market does not provide a satisfactory measure of
market value.
£
£
Value of
All Social
Costs
Value of
Total Social
Benefits
What’s the balance of costs and benefits to society?
i.e. the proposal’s PUBLIC VALUE /Net Present Value
Appraising Options at OBC stage using Social Cost Benefit Analysis
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JL
£
Value of
All Social
Costs
PUBLIC VALUE= Net Present Value
£
Value of
Total Social
Benefits
•CBA covers the entire life cycle of the proposal including
wind up costs
•CBA covers all quantifiable social costs and benefits
•CBA includes values for the cost of risks
•CBA enables the comparison of costs and benefits occurring
at different times through the use discounting
•CBA valuation is not an exact science
Appraising Options at OBC stage using Social Cost Benefit Analysis
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What should be “counted” in social
CBA according to the Green Book?
15
What do you do? What do you think?
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Green Book Refresh
The revised Green Book will contain some additional clarification
and explanation of social time preference and the value of public
capital and on labour market effects.
The social time preference rate will remain unaltered at 3.5%
Except for life and health effects where it will be 1.5%.
Declining long term discount rates will remain unchanged and
the lower rate OF 1.5% for health will be reduced on a pro
rata basis to the decline in the overall 3.5% rate.
Changes in productivity and in employment location will be
counted employment creation will not.
First round effects will be allowed second round multiplier
effects will not.
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Green Book Refresh
The revised Green Book will contain some clarification on
the valuation of risks to human life
o Statistical Life Years (SLYs) and the Value of a Preventable
Fatality VPF both refer to a small change to the level of risk of
loss at the 1:100,000 level, both are valid approaches that may
be appropriate in different contexts.
o Statistical life Years are valued on an equity basis taking no
account of the age or health states of individuals or groups.
o Particular proposal may add the value of other factors to the
value of SLYs.
(This is consistent with always valuing individual human life on
an equity basis while different treatments and other
interventions affecting life and health are valued not.)
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Green Book Refresh
some of the changes to look out for:
•
•
•
•
•
•
•
•
•
•
Rationalisation of Distributional Analysis
Revised PF2 guidance
Evaluation guidance will be clarified and improved
Dealing with Unmonetisable effects will be more clearly
explained
The scope for non-rigorous subjectively biased
weighting and scoring approaches without a sufficiently
objective basis will be eliminated
Appraisal summary tables will be introduced
Values for Noise and Air pollution effects
Valuation of effects on Natural Capitals
Valuation of Green House Gas emissions “Carbon” and
Energy Efficiency values.
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Benefits to
the Public
-
Costs to the
Public
=
Net Public
Value
Budgetary
Savings
-
Budgetary
Costs
=
Net Budget
Impact
Net Present
Public Value
=
Net Present
Budget
Impact
Appraising Options at OBC stage using Social Cost Benefit Analysis
Discounted
Net Present
Public Value
Discounted
Net Present
Budget
Impact
Public Value
for Money =
Benefit Cost
Ratio (BCR)
19
You can find all
this on the
Green Book
pages of
Treasury’s public
web site
Appraising Options at OBC stage using Social Cost Benefit Analysis
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An example of shared “Transferable” Values
Appraising Options at OBC stage using Social Cost Benefit Analysis
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There is more and it will keep growing
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Optimism Bias in Appraisal
Project appraisers’ tendency to be over optimistic: to underestimate costs and works duration,
and overstate the benefits that the project will bring.
40
Costs
Overestimated
35
Costs Underestimated
Frequency (%)
30
25
Distribution of cost variations from
Review of 258 transportation
original
projections
projects
worldwide for 258
transport projects world wide
20
15
10
5
00
-3
80
28
1
-2
60
26
1
-2
40
24
1
-2
20
22
1
-2
00
20
1
-2
80
18
1
-1
60
16
1
-1
40
1
-1
14
1
12
10
1
-1
20
00
0
-1
81
-8
0
61
-6
41
-4
0
0
-2
21
0
-0
0
21
-2
--
41
0
--4
0
-6
-8
0
--
61
0
Cost escalation from decision to proceed (%)
from Flyvjberg et al, American Planning Association
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Treatment of Risk in the public sector
Public sector risk is incurred as an unavoidable
consequence of the requirement to take action, make
regulations or hold assets in pursuit of public policy
The public sector can not cherry pick or trade in risk
profiles
The public sector’s objective is to mitigate risks by
managing them, making provision for contingency
and placing risk where it can best be managed.
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Uncertainty Optimism Bias & Risk
Business Case Development
Strategic
Outline
SOC
Outline
Business
OBC
Full
Business
FBC
Assessed Risk
Uncertainty
over
MEASURED
UNCERTAINTY
Costs
Benefits
Timescales
Optimism Bias
UNMEASURED
UNCERTAINTY
Residual
OB
TIME
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Optimism bias and Risk: Methodology
• Adjust strategic/outline business case cost and benefit
estimates based on evidence from similar projects or use
generic Green Book guidance.
• Reduce optimism bias as contributory risk factors are identified
and costs of risk management are included in the full business
case prior to contract
• Independent review (can be internal) of mitigating contributory
factors
• Note: this is the job of the economic case, not financial case
Appraising Options at OBC stage using Social Cost Benefit Analysis
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The Effect of Optimism Bias
1) Estimate likely costs
and benefits
2) Adjust for Optimism
bias and risk
180
160
140
£m
120
RISK
ADJUSTED
NET
BENEFIT
NET
BENEFIT
100
80
60
40
COSTS
BENEFITS
COSTS
BENEFITS
20
0
Costs
Expected benefit Costs (adjusted)
Benefits
(adjusted)
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Sensitivity Analysis and Risk
Always
• Explore outcomes through sensitivity to
variations in the values of the key variables
using confidence intervals.
• Identify switching values
Where suitable and useful
• Use of Monte Carlo Simulation
• Use of Scenarios
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Green Book and Risk :- Summary
•
•
•
•
•
•
Apply an allowance for Optimism Bias
Identify proposal specific risks
Create and maintain a risk register
Calculate the cost of risk mitigation
Build in risk management costs
Reduce optimism bias as specific risk costs are
accounted for
• Explore sensitivities, worst case scenarios and
switching values
• Place risk where it is best managed
• Be realistic about residual risk and contingent liabilities
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Simplified Example - Worst Case Sensitivity
1) Estimate likely costs and
benefits
2) Adjust for potential
Optimism Bias –and Risk
Evidence-based” or generic
Green Book adjustments
3) Carry out sensitivity
analysis
180
160
140
£m
120
100
Switching Values
80
60
Best estimate of net
benefit is £30m
40
Possible net cost of £20m
20
0
Costs
Expected benefit Costs (adjusted)
Benefits
(adjusted)
Appraising Options at OBC stage using Social Cost Benefit Analysis
Costs (upper
bound)
Benefits (lower
bound)
30
Discounting and Social Time Preference
People generally prefer to receive benefits now whilst
paying costs later this is time preference.
Costs and benefits occur at different points in the life
of a project so their valuation must take this into
account
The social discount rate or ‘Social Time Preference
Rate’ (STPR) is the rate at which society values the
present over the future
Separate concept from inflation – CBA should always
be in real base year prices
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Discounting and Social Time Preference
2%
1%
Wealth effect
+ Catastrophe
risk
Society
tends to
get richer
over time
Random
Uncertainty
about the
future
Marginal elasticity
of the utility of
consumption = 1
0.5%
+
Pure time
preference
1.5%
Life & Health
= 3.5%*
People prefer goods
& services sooner
rather than later
* A lower discount rate is used over
the very long-term i.e. 30+ years
Appraising Options at OBC stage using Social Cost Benefit Analysis
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Thank You
Appraising Options at OBC stage using Social Cost Benefit Analysis
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